Hi All, Need assistance with reference to the above. For question 18.19, why when the premium rates are calcualted on the basis of best estimate assumptions, except for the future bonus rates assumed to be 50% of the rates currently being declared by the company on its exisitng business , will result the bonus earning capacity of the new business be lower than that of the existing business? anyone kind to explain? or any numerical example to illustrate this? thanks in advance!!
I'll try. We're setting the new prices based on the expectation that we can afford to pay bonuses at 50% of current levels. This in return means the the bec for the new business is around 50% of current levelsl - since this is what we think we can afford to pay. One would hope that current levels of bonus are less than the bonus earning capacity on most existing business. Otherwise we're paying more than we can afford. Hence 50% is less than 100% which is less than the bec on existing business. qed??
